"National authorities must not allow selected companies to understate their taxable profits by using favourable calculation methods. It is only fair that subsidiaries of multinational companies pay their share of taxes and do not receive preferential treatment which could amount to hidden subsidies," Commission Vice President in charge of competition policy Joaquín Almunia said in a statement.

The tax ruling favoring Amazon that the Commission is investigating dates back to 2003 and is still in force. It applies to Amazon EU, a subsidiary based in Luxembourg that records most of Amazon's European profits.

Based on the tax ruling, Amazon EU pays a tax-deductible royalty to a limited liability partnership established in Luxembourg which is not subject to corporate taxation there. "As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg," the Commission said.

This royalty, which lowers the taxable profits of Amazon EU each year, might not be in line with market conditions, the Commission said.

"The Commission has concerns that the ruling could underestimate the taxable profits of Amazon EU Sàrl, and thereby grant an economic advantage to Amazon by allowing the group to pay less tax than other companies whose profits are allocated in line with market terms," it said, adding that the Commission will investigate in depth to determine whether its concerns are confirmed.

The opening of an in-depth investigation gives interested third parties and the countries concerned an opportunity to submit comments. It does not prejudge the outcome of the investigation, the Commission emphasized.

Neither Amazon nor the Luxembourg government immediately replied to a request for comment.

Loek is Amsterdam Correspondent and covers online privacy, intellectual property, online payment issues as well as EU technology policy and regulation for the IDG News Service. Follow him on Twitter at @loekessers or email tips and comments to [email protected]